Hospital Competition Improves Quality and Lowers Cost

"Patients in the least competitive fourth of hospital markets
experienced approximately 1.5 percentage points higher mortality after heart
attacks than those in the most competitive areas."

Not much good is being said these days about Health Maintenance
Organizations (HMOs). But NBER Research Associates Daniel Kessler and Mark
McClellan have something positive to report. They find that increasing HMO
enrollment through the 1980s and 1990s partially explains the increase in the
beneficial effects of hospital competition during this period.

In Is Hospital Competition Socially Wasteful?
(NBER Working Paper No. 7266),
Kessler and McClellan analyze Medicare claims data for the vast majority of
elderly non-rural beneficiaries admitted to a hospital with a primary diagnosis of a
heart attack (acute myocardial infarction, or AMI) from 1985 to 1994. They
combine that with data on hospital characteristics collected by the American
Hospital Association.

They find that, before 1991, competition led to higher costs and, in some
cases, lower rates of adverse health outcomes for elderly Americans with heart
disease. After 1990, competition led both to substantially lower costs and to
significantly lower rates of adverse outcomes. As of 1991, it was approximately 8
percent more costly to be treated in the least competitive fourth of hospital
markets, as compared to the most competitive fourth. And, the quality of care in
competitive markets was higher as well. Patients in the least competitive fourth of
hospital markets experienced approximately 1.5 percentage points higher mortality
(that is, were more likely to die) than those in the most competitive areas.

Expressed as a share of 1994 average mortality from AMI in the elderly,
competition had the potential to improve mortality by 4.4 percent, the authors find.
Patients from the least competitive markets also experienced higher rates of
readmission for some cardiac complications, suggesting that the additional
survivors attributable to competition in hospital markets were not in especially
marginal health.

For two reasons, the authors conclude that increasing HMO enrollment over
the sample period partially explains the dramatic change in the impact of hospital
competition. First, hospital competition unambiguously improves welfare
throughout their sample period in geographic areas with above-median HMO
enrollment rates. Second, point estimates of the magnitude of the benefits of
competition are uniformly larger for patients from states with high HMO enrollment
as of their admission date, as compared to patients from states with low HMO
enrollment.

Kessler and McClellan suggest that spillover effects from increasingly
efficient treatment of privately-insured patients may have affected the treatment
regimen of Medicare patients, by mediating the consequences of hospital
competition in a way that enhances medical productivity. In particular, managed
care appears to increase efficiency by reducing the tendency of hospital
competition to result in a "medical arms race" of expenditure growth - excessive
spending on medical care producing minimal benefits for patients.

These findings, the two economists write, are not affected by the structure
of the hospital market, such as distance to the nearest hospital, hospital bed
capacity utilization, and the characteristics of area hospitals. In future work, they
intend to explore whether these findings extend to patients with non-acute illnesses
(such as cancer), and to study further the mechanisms through which competition
among providers enhances social welfare.

-- David R. Francis

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